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At ICC Austria’s Trade Finance Week, Trade Finance Global spoke with Isaac Mahanke, group head for traditional trade products at Standard Bank, to shed light on the prevalence and advantages of demand guarantees in Africa. 

This wide-ranging conversation serves to highlight the distinct features and benefits of demand guarantees in Africa compared to other trade finance products used worldwide.

Exploring the demand guarantee landscape in Africa 

Africa’s vast infrastructure investment drive have given rise to significant demand for guarantees – particularly performance and advanced payment guarantees – which are generally used to support construction contracts between employers, contractors, and subcontractors.

This preference for demand guarantees is largely unique to the continent, with other regions of the world tending towards other instruments instead. 

Mahanke said, “Around the world, we see a lot of standby letters of credit and suretyships. You also have letters of credit and insurance products across the world that are especially used to support commercial contracts. But in Africa, demand guarantees are the flavour of the continent, since they give more comfort to beneficiaries.”

Demand guarantees offer several key advantages that contribute to their popularity in Africa. 

First and foremost, they provide an additional layer of protection for both parties involved in the transaction. If the underlying contract fails to perform, beneficiaries can access the second layer of protection by making a simple demand for payment under the guarantee. 

This streamlined process ensures ease of use and offers peace of mind to both applicants and beneficiaries.

Moreover, demand guarantees are independent of the underlying performance, unlike other complex trade finance products. This independence prevents interference with the primary contract, allowing beneficiaries and applicants an added level of security over more intricate alternatives. 

The uncomplicated nature of demand guarantees makes them a favourable choice, particularly in Africa, where simplicity and clarity are valued.

Overall this confidence, reliability, and simplicity have helped make demand guarantees popular across the continent, making it even more important for practitioners to understand the rules that govern their use.

Understanding the URDG 758 rules governing demand guarantees

Several essential rules underlie demand guarantees, ensuring the rights and obligations of both applicants and beneficiaries, the most notable of which are the Uniform Rules for Demand Guarantees, known as URDG 758

These rules, which articulate the requirements for obtaining protection and the performance expectations for each party, have been implemented by many banks, including Standard Bank, to support demand guarantees effectively. 

Mahanke said, “The URDG 758 are the lifeblood of commerce, as we say, because they support a lot of projects in Africa so that we can see growth and development.”

One way they help to promote this growth is by providing clarity around requirements or expectations. Although demand guarantees offer significant advantages, complexities can arise due to misunderstandings or a lack of knowledge. 

Parties unfamiliar with their use might introduce conflicting clauses or terminology, leading to complications in the guarantee process. Additional factors such as sanctioned clauses and unfamiliar local laws further contribute to the complexity surrounding demand guarantees. 

Education and awareness are vital to ensuring all stakeholders understand and adhere to the rules, resulting in a smoother guarantee process.

The role of education

Advanced payment guarantees are not always simple instruments to administer. 

Mahanke said, “In some of the cases that come through my desk, especially around advanced payment guarantees, we see that there is a lot of confusion and understanding in terms of how the product works.”

In some instances, beneficiaries may attempt to amend clauses related to the flow and timing of payment, disregarding the need for documentary evidence proving that the payment has been made to the applicant. 

Such actions generally stem from a lack of understanding regarding the documentary requirements, rather than malicious intent, and can lead to frustrations when claims are rejected. 

The importance of education and awareness becomes evident in scenarios like this. By familiarising all parties involved with the rules and processes governing demand guarantees, these complications can be minimised. 

Institutions like the ICC Austria, as well as banks and trade finance global organisations, play a crucial role in educating stakeholders about demand guarantees in Africa. 

Training programs, workshops, and informational resources can enhance understanding, ensuring that all parties involved know their rights, obligations, and the necessary documentation for a smooth guarantee process.

Demand guarantees gaining traction in Africa

Demand guarantees have gained significant traction in Africa’s trade finance landscape, particularly in the context of construction contracts and infrastructure investments. 

Their simplicity, independence, and an added layer of protection make them a preferred choice for both applicants and beneficiaries. 

However, complexities and misunderstandings can arise, emphasising the importance of education and a sound awareness of the governing rules, such as URDG 758. 

Through continuous education and innovation, demand guarantees can further contribute to the growth and development of trade finance in Africa, promoting economic prosperity across the continent and beyond.